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Proposed changes to tax abatement get heated debate in City Council

Council has to act by Dec. 12 or wait until newly elected members, including anti-abatement activist Kendra Brooks, are seated in January.

This article was originally published in The Notebook. In August 2020, The Notebook became Chalkbeat Philadelphia.

Depending on who you listen to, Philadelphia’s 10-year tax abatement on new residential development is either a growth-boosting policy in need of minor revisions or a budget-crippling giveaway that exacerbates racism and inequity.

Or something in between.

That was the mixed message at Tuesday’s City Council hearings on the future of the abatement, which will soon face its first substantive reconsideration by lawmakers after almost two decades. After more than three hours of public testimony, Council voted unanimously to advance a package of reforms sponsored by Council President Darrell Clarke, setting the stage for a final vote before the end of the year.

“A lot of people don’t think we’re going far enough. But we want a reasonable approach,” said Clarke, whose proposed legislation would reduce but not eliminate the abatement, essentially cutting in half its subsidy for new construction.

“At some point, you’ve got to adjust,” said Clarke. His bill would provide a full tax break in the first year, and then slowly raise payments over the course of 10 years. “It’s been a 20-year run. … We’re approaching a significant change that will help the School District.”

The proposed changes come as City Council and Mayor Kenney face rising concerns about the impact of the abatement. In November, voters elected a staunch abatement opponent, Kendra Brooks, to an at-large Council seat, and a chorus of public school parents and activists has steadily called for its elimination, saying it drains schools of vital funding.

That perspective was on full display at Tuesday’s hearings, with community advocates calling the abatement a “cruel hoax” that embodies what one student activist called “violence against black and brown communities.” Former District teacher Ron Whitehorne of the 215 People’s Alliance, a civic group, called the abatement a reflection of the city’s “warped priorities” and called on Clarke to end it entirely.

“Of course we need development, but the question is what kind,” said Whitehorne. “We want the kind that helps Philadelphia schoolchildren [and] that provides adequate housing for all our people.”

Another retired teacher, Dianne Hamilton-Mitchell, said she’d given up her side job as a real estate agent because she didn’t want to help developers and speculators push out her low-income neighbors in favor of students and prosperous professionals – a trend she believes has been exacerbated by the abatement’s various incentives.

“This is not brotherly love anymore. It’s, ‘Where’s the money?’” said Hamilton-Mitchell. “You took the neighborhood and you divided it, and that’s where the racism starts. … Let’s end this tax abatement. Let’s end it now.”

Other testimony from nonprofits and civic groups called for more measured changes. The affordable housing group Habitat for Humanity supports Clarke’s proposed revisions, noting that the abatement now protects residents who recently bought homes in gentrifying neighborhoods. But Habitat called on Council to find ways to ensure that any new revenue that comes from modifying the abatement ends up supporting housing and schools.

The Philadelphia Association of Community Development Corporations (PACDC) delivered a similar message, saying that it decided to back Clarke’s bill after being “assured” by Council and the Kenney administration that any changes won’t hurt the developers who rely on the abatements to finance affordable-housing projects.

“Tax abatement reform is long overdue,” said PACDC’s Beth McConnell. “It is inequitable for Philadelphia taxpayers to subsidize profitable market-rate development that does not need subsidy.”

And officials from the Preservation Alliance praised Clarke’s revisions for treating renovations the same as new construction – a policy that will help homeowners of all income levels and communities, Alliance president Paul Steinke said.

“This is how it should be in a city in which around 70% of structures date from prior to 1940,” Steinke said.

Meanwhile, construction industry leaders defended the basic principle of the abatement and called on Council to amend Clarke’s bill to soften the blow and protect what one executive called “a fragile industry.”

“We understand that it’s time for change,” said Jim Maransky of the Building Industry Association (BIA). “But change this drastic could have a dramatic impact on the market.”

Clarke has made abatement reform a priority this year, and the industry has reportedly been hard at work to limit changes. A recent victory: killing a proposal to “cap” the abatement by allowing only partial tax breaks for high-dollar homes.

And although Tuesday’s unanimous vote to advance the bill signals strong support, the bill can still be amended before a final vote. Among the industry’s recommendations: delay implementation of the proposed changes in order to ensure that financing comes through for projects currently in development.

BIA treasurer Gary Jonas noted that three such projects are in Clarke’s own district.

“None of those projects are going to be able to get through the city process” if the proposed changes go through, Jonas said. “A lot of projects that are somewhat far along would be changed.”

Millions of dollars at stake

Council’s estimate is that Clarke’s changes would bring almost $300 million in new revenue over the next decade. City and District officials agree that Clarke’s changes would boost near-term revenues, but city officials say that they could reduce overall revenue in the long run, by reducing construction and the economic growth that comes with it.

Uri Monson, chief financial officer for the District, praised Clarke’s proposed changes to the abatement, saying that they would boost District revenue significantly during the next decade.

Residential and commercial abatements cost the District about $61 million in 2018, Monson said. But reducing the abatement under Clarke’s plan would restore a portion of that funding – an estimated $148 million over the next 10 years, “if the proposed ordinance is passed,” Monson testified.

And although the District has already stabilized its finances and boosted its bond rating, Monson said, Clarke’s bill would further strengthen its fiscal profile and borrowing capacity.

“These additional funds would be the sustainable, recurring, predictable revenues on which the District relies in order to make investments in our students, staff, and schools,” Monson said.

However, Monson also said that Clarke’s proposed boost to the “homestead exemption” (which spares some longtime homeowners from paying increased property taxes) would cost the District about $9.5 million next year – “equivalent to the annual cost of 79 teacher salaries,” Monson said.

Speaking for the Kenney administration, city Finance Director Rob Dubow said the proposed change to the homestead exemption would cost the city and District about $15 million and asked that Council delay any action until it takes up the 2021 budget.

Kenney’s chief of staff, Jim Engler, said the mayor was open to changing the abatement. The subsidy has helped “strengthen the city’s real estate market” and boost its tax base, Engler said. However, he said, “the market has changed … and we agree that the abatement is worth revisiting.”

Engler’s main concerns are for the long term. He said that the city estimates that Clarke’s revisions will eventually reduce the amount of construction activity, but not for 20 to 30 years. However, Engler also acknowledged that under Clarke’s revised bill, “there are revenue gains in the short term.”

That drew a wry reaction from Clarke, who like all Council members faces re-election every four years: “Short term? You mean through 2028?”

Engler nodded, and said, “The question is what happens after that.”

Assessments under fire

Clarke’s proposed bill had wide support in Council even before Tuesday’s unanimous vote, drawing 14 co-signers when introduced last month – enough to pass and even override a mayoral veto if necessary. Kenney has said that he is willing to sign the bill.

But the questions from Council members at Tuesday’s hearings showed concern not just about the abatement, but about rising tax assessments that accompany development in neighborhoods.

As Clarke put it, for many residents, the impact of new construction isn’t felt until their mortgage holder demands new payments to match rising property values.

The concern for the existing residents is, “they get a letter every year from their mortgage company that says, ‘your escrow account is going up.’ And what those residents do is, they write that check,” said Clarke.

Maria Quinones-Sanchez said such property value increases are frequently unjustified, due to what she called the “unfairness” of the city’s assessment system.

“The problem is not the abatement, although it could be tweaked. … The assessment process is still broken,” she said. New development drives up assessed values for homes that aren’t actually worth the money, she said. “Their house still has one bathroom.”

The question, she said, is, “how do we incentivize building in this city and minimize the impact on long-term residents?”

Councilwoman Cindy Bass said she was surprised to see the Kenney administration echoing some of the construction industry’s demands.

“It’s sort of like the doom and gloom is going to happen if we end the tax abatement … and I just don’t believe it to be so,” she said.

Councilman Curtis Jones said he, too, was unconvinced by what seemed to him pessimistic revenue projections from the industry and the Kenney administration.

“I tend to be optimistic about this city,” said Jones.

Engler agreed that the city’s projections aren’t guarantees and that multiple factors will shape future revenues.

But he also said that the city’s analysis shows that it will be impossible to cut the abatement without slowing some kinds of development, somewhere in the city.

“No matter where you change it, there will be some negative impact,” he said. “You can’t change a policy … and not expect any impact at all.”

Council has until Dec.12 to vote on Clarke’s bill. If it fails to pass by then, it would have to be revived after the newly elected Council members take their seats in January.